The Privatization Act, 2023 (“the Act”) was signed into law on October 9, 2023, ushering in a new era in the government’s attempts to privatize state owned enterprises from public ownership to private ownership.

The Act was largely necessitated by the need to improve efficiency and general competitiveness of state-owned entities that have been bedeviled by inefficiencies and a long streak of loss-making years. Further, the Act was aimed at repealing the Privatization Act, 2005 (“the Repealed Act”), which was considered by many to be too restrictive. The Repealed Act was viewed as having many onerous requirements for obtaining approvals as well as long processes to get results which impeded the privatization process.

The rationale underlying the enactment of the Act is: to enhance private participation in the economy; to improve the infrastructure and service delivery; to lessen the need for government resources; to increase government revenue through compensation for privatizations; to enhance economic regulation in the country; and to expand the base of ownership in the Kenyan economy by promoting private enterprise ownership, among others. Additionally, the Act is aimed at removing some of the legal and regulatory bottlenecks that were apparent in the Repealed Act.

This Article outlines the key changes introduced by the Privatization Act, 2023 and the general impact of the new Act on the privatization process.

  1. Change in Corporate Structure and Management

One of the most notable changes introduced by the Act is the establishment of the Privatization Authority to replace the Privatization Commission. Unlike the Privatization Commission, the Privatization Authority is established as a body corporate with a separate corporate personality which is capable of suing and being sued, entering into contracts, acquiring and owning property, and all other things as are capable of being done by a body corporate. Unlike the previous Privatization Composition, the composition of the Privatization Authority will include: the chairperson appointed by the President; Principal Secretary to the Treasury; the Attorney General; the Secretary to the State Corporations Advisory Committee; Managing Director of the Authority; and four persons appointed by Cabinet Secretary, National Treasury. Notably, the Act has removed the requirement of obtaining the approval of the National Assembly for the members of the Privatization Authority who are appointed by the Cabinet Secretary.

  1. Establishment of the Privatization Authority

The Privatization Authority is one of the key stakeholders under the Act mandated with the overall obligation of advising the government on all aspects of privatization. Other key roles of the Privatization Authority include: implementing the Privatization Programme once ratified by the National Assembly; facilitating in the implementation of government’s privatization policies; preparing and implementing specific proposals on privatization; preparing long-term divestiture sequence plan; monitoring implementation of privatization programmes etc.

  1. Privatization Programme

The Cabinet Secretary of the National Treasury is now mandated to formulate a Privatization Programme, a role previously undertaken by the Privatization Commission under the Repealed Act. In formulating the Privatization Programme, the Cabinet Secretary is required to consult experts and individuals/entities likely to be affected by the Privatization Programme after identifying the entities proposed to be privatized. The Privatization Programme must be submitted to the National Assembly for ratification.

To forestall delays in the National Assembly’s processes, the Act mandates the National Assembly to consider a Privatization Programme within 60 days of receipt of the same from the Cabinet Secretary. In the event the National Assembly fails to ratify the Privatization programme within the stipulated timelines, the programme will be automatically ratified after 90 days. Once ratified, the Privatization Programme remains valid for a period of 5 years which can be extended by a further 12 months.

This amendment is critical in addressing the Repealed Act ambiguity on timelines thus streamlining the ratification process.

  1. Privatization Proposal

The Act requires the Authority to prepare a privatization proposal for each entity that has been identified for privatization and the same to be included in the Privatization Programmme and submitted to the Cabinet Secretary for the National Treasury. The Privatization proposal must be approved by the Cabinet Secretary before implementation. 

  1. Methods of privatization

Some of the methods of privatization in the Act include: initial public offer of shares; sale of shares by public tender; sale resulting from the exercise of pre-emptive rights; or such other method as the Cabinet Secretary determines. Sale of Assets including Liquidation is no longer considered a method of privatization.

  1. Miscellaneous

Other key changes introduced under the Act include:

  1. Monopoly

In recognition of potential monopoly brought about by privatization, the Act provides that where a proposed privatisation results in unregulated monopoly, the Privatization Authority can ensure that the principal Agreement for the privatization provides for the regulation of the monopoly, subject to the Competition Act. Where a privatization is likely to result in a monopoly, the approval of the Cabinet Secretary must be sought.  

    b. Proceeds of Privatization

Where there is a sale of a direct National Government shareholding, the Act provides that the proceeds of such privatization should be channeled into the Consolidated Fund. In the case of the sale of a state corporation’ shareholding, the Act provides that proceeds from such privatization should be deposited in a special interest-bearing account established for that state corporation in order to safeguard the erosion of the balance sheet of the state corporation.

  1. Conclusion

In conclusion, it is envisaged that the progressive amendments introduced by the Privatization Act, 2023 will play a key role in improving the efficiency and profitability of state-owned enterprises with regards to fiscal benefits, effective control and governance, improved service delivery, and maximization of performance of public entities.

Further, it is anticipated that the benefits arising from privatization will lead to the development of capital markets as more individuals are more likely to invest in shares and bonds issued by the privatized entities. However, there remains concerns on the potential abuse of powers by the Cabinet Secretary of the National Treasury who has now assumed a dominant role in privatization with little parliamentary oversight.

Article by Thiong’o Karuga and Emily Ogonyo

Published on 24th November 2023

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